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We are a civilian (non-DOD) agency. The contract under consideration is a non-commercial 3 year IDC $1.5M Time and Materials (T&M) type contract. There is a D&F in the file signed by the HCA. It is not competed; a J&A is in file.

Question on Overhead and Overhead rate: I see from FAR 16.601©(2) that the contractor must propose labor categories and actual hourly rates. (also 52.216-30( B ))

T&M contracts are in the family of Level of Effort (LOE) contracts and they share similarities with cost-type contracts. In cost-type contracts, the actual overhead may change in the course of contract performance, whether as part of DCAA audit or a Pricing Rate Agreement (PRA), or at contract close-out in close-out audit. (But again, we are not-DOD and we don’t have access to DCAA).

Q: If I keep the unburdened labor rates as proposed, and the fee as proposed, am I entitled to adjust the contractor’s Overhead (OHD)? I would not want the contractor to get a windfall if his actual OHD shrinks in year 2 and 3 and I am not interested a loss scenario for the contractor either. So, may the OHD be reasonably be adjusted?

The payment clause is 52.232-7. It is clear that the labor rates are fixed. It is silent on the issue of whether the overhead burden on the labor rate can be adjusted.

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John,

Didn't you say the hourly labor rates are fixed? You're right.

You cannot change the hourly rates. A rate is the sum of its parts. You cannot change any one part without also changing the sum (or having an offsetting change in another part). The overhead burden is part of the hourly labor rate (see 52.232-7( a )( 4 )). You cannot change the hourly labor rate; so therefore you cannot change the overhead burden (because changing the overhead burden necessarily changes the hourly rate).

In this regard, a T&M contract is more of a fixed-price than a cost-reimbursement effort. Here, I am only speaking of the hourly rate portion of the T&M contract type.

I recommend that you use the appropriate language -- the right words are provided in 52.232-7( a )( 4 ). Use "profit", not "fee". Use "indirect costs" and "general and administrative expenses" rather than "overhead" or "burden". It works better.

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You agreed to the labor rates at time of award, having seen what went into them. You want to adjust the rates if the contractor's overhead or G&A decreases. So you are also going to adjust the rate every time the average direct labor rate of employees in a labor category change (due to raises, turnover, etc)? What if the the overhead or G&A increases? Are you going to adjust them upwards?

Speaking from my vendor days - negotiating the initial labor rates for the contract years is where the contractor takes his risk. He's basing his proposed escalation rate on what he thinks will happen in the economy (raising direct labor costs), what will happen with his OH and G&A rates and trying to make a little profit. It's up to him to control his OH and G&A rates or he is effectively reducing his profit percentage.

When I had turnover on a T&M contract, the directive was to hire a repalcement who fit the labor category qualifications as cheaply as I could. Not everyone in the labor cat had to make the same annual salary, but the goal was to make sure the average rate of people in the same labor cat on the same contract stayed below a target number. That way, the OH, G&A and profit were all covered. Sometimes by the end of a contract we were making a larger profit on one labor cat than another - but that was OUR problem, not the Government's.

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Guest Vern Edwards

You say you are asking about a contract. Well, think contractually. Does the contract state an overhead rate for labor? If so, does the contract say you can change the stated overhead rate based on the contractor's actual costs? If the contract does not state an overhead rate for labor, what is there to change? If it does state an overhead rate, but does not say you can change it, why are you asking?

Ordinarily, a T&M contract does not state an overhead rate for labor. The rate is hidden in the labor rates, and the labor rates are fixed. Ordinarily, there is no clause in a T&M contract that entitles the government to change the fixed labor rates based on the contractor's actual cost experience. A contract modification, such as a change to the statement of work, might affect the cost of labor and entitle one of the parties to an equitable adjustment of the labor rates. But unless there is such a contract modification, each party must live with the rates in the contract.

A T&M contract has characteristics of both fixed-price and cost-reiimbursement contracts, but it is not in the family of level-of-effort contracts. An LOE contract requires that the contractor deliver a specified level of effort as a condition of payment of a fixed-price or payment of the full fee under a CPFF contract. Failure to deliver the specified level of effort under a fixed-price LOE contract is a breach of contract. The ceiling price of a T&M contract is not a level of effort. The contractor does not have to actually incur the ceiling price in order to be entitled to payment for the hours it has performed.

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  • 8 months later...

With regard to T&M contracts, I understand the labor rates for "time", as negotiated and set forth in the contract, are not subject to retroactive adjustment. However, what about the indirect rates which are applied to non-labor "material" costs (i.e., materials, travel, ODCs, etc.)? Since DCAA includes T&M contracts in the category of "flexibly-priced" contracts which are audited as part of the contractor's incurred cost audit, does this mean the indirect costs associated with non-labor costs, i.e., G&A, material burden, etc., under a T&M contract must be retroactively adjusted after final indirect rates are established? This would certainly delay the closeout of T&M contracts, unless quick closeout procedures are used.

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Debra, the answer to your question is yes. Note that under 52.232-7, material is subject to the Allowable Cost and Payment clause. That clause requires contractors to submit an incurred cost proposal to establish final indirect cost rates at the end of each of the contractor's fiscal years. Also, 52.232-7 permits contractors to include indirect costs in the cost of material. If those indirect costs are allocated based on an indirect cost rate, that rate will have to be adjusted to an actual rate to avoid having a cost plus percentage of cost contract.

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